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May 2007
Basis and Holding Periods of Investments Tracking the cost basis of an investment can be difficult and time consuming, but it is very important. The cost basis is used to measure the gain or loss upon disposal of the investment. The holding period of the investment will determine the tax treatment in the event there is a gain involved. The initial cost basis is the amount invested plus any purchase costs, such as broker fees. A number of other transactions during the life of the investment affect the initial investment and will adjust the initial basis. These include reinvestment of dividends, return of capital or principal payments, stock splits and mergers. It is important to continuously track your investment from the purchase date to the sale date to determine the adjusted cost basis. The adjusted cost basis will be used to determine your gain or loss in the investment. Therefore, correctly tracking your cost basis could save you a significant amount of tax. Another important detail to track is the holding period of an investment. Generally, assets held one year or less are classified as short term and assets held over one year are classified as long term. Short-term gains on the sale of assets are taxed at ordinary income tax rates. Generally, long-term capital gains are taxed at 15 percent (5 percent if ordinary income rates are less than 15%). The long-term capital gain tax is, generally, much lower than what you pay on your ordinary income tax rates. From a tax standpoint, it could be advantageous to hold off on the sale of an asset until it would be classified as long-term to lower the tax liability in the event of a gain. If you have losses on investment sales, you can offset any gains during the year and deduct an additional $3,000 of losses against other income. Losses not deducted in the current tax year are carried forward indefinitely until deducted. Now may be a good time to review your investment records to determine if you have accurate basis and holding period information for all your investments. If you have any questions or need assistance regarding your cost basis or holding periods of any investments, please contact our office.
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